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(shorter version of partnership if you scroll down, but more info is found in this version 🙂)
Partnership

This document summarizes the key points of Philippine Partnership Law, focusing on the rights
and obligations of partners, the partnership itself, and its liabilities to third parties.

1. Partnership Formation & Relationships

- Definition: A contract of partnership creates four kinds of relationships:

- Among Partners: Partners have mutual rights and obligations.
- Between Partners and the Partnership: Partners contribute to the partnership and have rights
to its assets and profits.
- Between the Partnership and Third Persons: The partnership is liable for its debts and
contracts.
- Between Partners and Third Persons: Partners can be held liable for partnership debts.

2. Rights and Obligations of Partners

2.1 Rights

- Right to Contribution: Each partner is obligated to contribute to the partnership's capital.

- Right to Warranty: Partners warrant the quality and ownership of specific contributions, similar
to a seller's warranty to a buyer.
- Right to Pro-Rata Application of Sums: When a partner collects a debt owed to them
personally from someone also owing the partnership, the collected sum is applied proportionally
to both debts.
- Right to Compensation: Partners are liable for damages caused by their fault, but courts can
lessen this liability if they contribute significantly to the partnership's success.
- Right to Accounting of Profits: Partners must account for any benefits derived from
transactions related to the partnership without the consent of other partners.
- Right to Reimbursement: The partnership is responsible for expenses incurred by partners on
its behalf.
- Right to Associate Another Partner: Partners can bring in new partners with the consent of all
existing partners.
- Right to Inspect Partnership Books: Partners have the right to inspect the partnership's books
at reasonable hours.
- Right to Formal Account: Partners can request a formal accounting of partnership affairs under
specific circumstances.
Property Rights: Partners have rights to:
- Specific Partnership Property: Partners have equal rights to possess specific partnership
property, but it cannot be assigned, levied, or attached.
- Interest in the Partnership: This includes their share of profits and capital, which can be
assigned, levied, or attached.
- Participation in Management: Partners may be appointed as managers in the partnership
agreement.
- Right to be Reimbursed by the Partnership: The partnership must reimburse partners for
expenses incurred on its behalf.
- Right to Ask for Dissolution: Partners have the right to seek dissolution of the partnership
under certain conditions.

2.2 Obligations

- Obligation to Render True Information: Partners must provide truthful information about
partnership affairs to other partners.
- Obligation to Account and Act as Trustee: Partners must account for any benefits derived from
partnership-related transactions and hold any profits as trustees for the partnership.
- Obligation Not to Engage in Another Business:
- Capitalist Partner: Prohibited from engaging in the same kind of business as the partnership
unless there is a stipulation to the contrary.
- Industrial Partner: Prohibited from engaging in any business without the partnership's express
permission.
- Obligation to Share in Profits/Losses: Partners share profits and losses according to the
agreement. If there is no agreement, they share proportionally to their contributions, with
industrial partners not liable for losses.
- Obligation to Share in the Profits/Losses: Partners share profits and losses according to the
agreement. If there is no agreement, they share proportionally to their contributions, with
industrial partners not liable for losses.

3. Partnership's Liabilities to Third Persons

- Operate Under a Firm Name: Partnerships must operate under a firm name, which may or may
not include the names of partners.
- Liability for Partnership Debts: All partners, including industrial partners, are liable pro rata for
partnership debts after partnership assets are exhausted.
- Liability for Partnership Contracts: Every partner is an agent of the partnership for its business.
Acts done in the usual course of business bind the partnership, unless the partner lacked
authority and the third party knew of this lack of authority.
- Liability for Admission by a Partner: Admissions or representations made by a partner
concerning partnership affairs are evidence against the partnership.
- Liability for Wrongful Acts: The partnership is liable for losses or injuries caused by a partner's
wrongful act or omission in the ordinary course of business or with the authority of other
partners.
- Liability for Misapplication of Money or Property: The partnership is liable for losses caused by
a partner misapplying money or property received in the course of business.
- Liability in Case of Partnership by Estoppel: If someone represents themselves as a partner or
consents to being represented as a partner, they can be held liable as if they were a partner.
- Liability of an Incoming Partner: An incoming partner is liable for all partnership obligations
incurred before their admission, but this liability is satisfied only out of partnership property
unless there is a stipulation to the contrary.
- Notice to or Knowledge of the Partnership: Notice to any partner of partnership affairs operates
as notice to the partnership.

4. Dissolution and Winding Up

- Dissolution: The change in the relationship of partners caused by a partner ceasing to be

associated with the partnership.
- Winding Up: The process of settling partnership affairs after dissolution, including collecting
and distributing assets, paying debts, and determining the value of partners' interests.
- Termination: The point in time when all partnership affairs are completely wound up and
settled.
- Causes of Dissolution:
- Without Violation of Agreement: Termination of a definite term or particular undertaking,
express will of partners, expulsion of a partner, etc.
- In Contravention of Agreement: Express will of a partner before the expiration of a specified
term, with or without justifiable cause.
- By Operation of Law: Unlawful business, loss of a specific contribution, death of a partner,
insolvency, etc.
- By Decree of Court: Partner declared insane, partner incapable of performing their duties,
partner breaches the agreement, etc.
- Other Causes: Admission of a new partner, retirement of a partner, assignment of rights to a
sole remaining partner, etc.
- Effects of Dissolution: Terminates the authority of partners to act for the partnership, except for
winding up affairs or completing transactions begun before dissolution.
- Winding Up: Partners who have not wrongfully dissolved the partnership or the legal
representative of the last surviving partner (not insolvent) have the right to wind up partnership
affairs.
- Rights of Partners in Case of Dissolution: Depend on the cause of dissolution and whether the
partnership is continued.
- Order of Application of Assets: Creditors, partners (excluding capital and profits), capital of
partners, profits of partners.

5. Limited Partnership

- Definition: A partnership formed with general partners who manage the business and limited
partners who contribute capital, share in profits, but do not manage the business and are not
personally liable for partnership obligations beyond their capital contributions.
- Formation: Requires compliance with statutory requirements, including signing and swearing a
certificate and filing it with the Securities and Exchange Commission (SEC).
- Rights of Limited Partners: Right to return of contribution under certain conditions, right to
share in profits, etc.
- Dissolution: Generally dissolved by the retirement, death, insolvency, insanity, or civil
interdiction of a general partner, but can be continued under certain conditions.
- Order of Payment: Creditors, limited partners' profits and compensation, limited partners'
capital, general partners' payables, general partners' profits, general partners' capital.

This summary provides a basic understanding of Philippine Partnership Law. For a more
detailed understanding, refer to the specific articles of the Civil Code of the Philippines.

Overview
This lecture note covers the various aspects of partnership law, including the formation, rights
and obligations of partners, liability, dissolution, and winding up. It also discusses limited
partnerships.
Core Knowledge Points
● Formation of a Partnership: A partnership is formed by a contract between two or more
persons who agree to combine their efforts and resources to carry on a business and
share in the profits and losses.
● Rights and Obligations of Partners: Partners have various rights, including the right to
contribute to the partnership, the right to warranty, the right to have sums applied
pro-rata, the right to be compensated, and the right to accounting of profits. They also
have obligations, such as the obligation to reimburse partners, the obligation to render
true and full information, and the obligation to share in the profits and losses.
● Liability of Partners: Partners are liable for the debts and obligations of the partnership,
both to third persons and among themselves. The liability of partners is generally
pro-rata, meaning that each partner is liable for a share of the debt in proportion to their
contribution to the partnership.
● Dissolution and Winding Up: A partnership can be dissolved by various events, including
the death of a partner, the withdrawal of a partner, or the bankruptcy of the partnership.
When a partnership is dissolved, it must be wound up, which means that the
partnership's assets must be collected, debts must be paid, and the remaining assets
must be distributed to the partners.
● Limited Partnerships: A limited partnership is a type of partnership where there are two
types of partners: general partners and limited partners. General partners have unlimited
liability for the debts and obligations of the partnership, while limited partners have
limited liability. Limited partners are not allowed to participate in the management of the
partnership.
Key Points
Rights and Obligations of Partnership and Partners:
● Right to Contribution: Partners are obligated to contribute the amount they promised to
contribute.
● Right to Warranty: Partners are responsible for any defects in the property they
contribute.
 ● Right to Have Sums Applied Pro-Rata: When a partner collects a debt owed to the
partnership, the debt should be applied pro-rata to the partnership's debt and the
partner's personal debt.
● Right to Be Compensated: Partners are entitled to compensation for their contributions
to the partnership.
● Right to Accounting of Profits: Partners are entitled to an accounting of the profits of the
partnership.
● Obligation to Reimburse Partners: Partners are obligated to reimburse other partners for
expenses incurred on behalf of the partnership.
Liability of Partners:
❖ Liability for Partnership Debts: Partners are liable for the debts of the partnership, both to
third persons and among themselves.
❖ Liability for Partnership Contracts: Partners are agents of the partnership and can bind
the partnership with their actions.
❖ Liability for Wrongful Acts: Partners are liable for wrongful acts that cause harm to third
persons.
❖ Liability for Misapplication of Money or Property: Partners are liable for misapplication of
money or property belonging to the partnership.
Dissolution and Winding Up:
● Causes of Dissolution: A partnership can be dissolved by various events, including the
death of a partner, the withdrawal of a partner, or the bankruptcy of the partnership.
● Winding Up: When a partnership is dissolved, it must be wound up, which means that
the partnership's assets must be collected, debts must be paid, and the remaining
assets must be distributed to the partners.
● Limited Partnerships:
● Formation of a Limited Partnership: A limited partnership is formed by a contract
between two or more persons who agree to combine their efforts and resources to carry
on a business and share in the profits and losses.
● Characteristics of a Limited Partnership: Limited partners have limited liability and are
not allowed to participate in the management of the partnership.
● Rights and Obligations of Limited Partners: Limited partners have the right to return their
contribution to the partnership, but they are not liable for the debts and obligations of the
partnership beyond their capital contribution.
Intermediate Accounting

Provisions, Contingencies, and Other Liabilities

This document discusses the accounting treatment of provisions, contingencies, and other
liabilities. It also covers topics such as customer loyalty programs, warranties, and value-added
taxes (VAT).

Recognition of Liabilities

A liability is recognized in the financial statements (FS) if it meets the following criteria:

● Definition of liability: It represents a present obligation of an entity to transfer an

economic resource as a result of past events.
● Relevance and faithful representation: It provides useful information that is relevant and
faithfully represented.
● Benefits justify cost: The benefits derived from the information justify the cost of
obtaining it.
● Measurability: It is measurable.

Provisions

● A provision is an existing liability of uncertain amount or timing.

● It is recognized when it is probable that an outflow of resources will be required to settle
the obligation and the amount can be measured reliably.

Contingent Liabilities

● A contingent liability is a possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or more
uncertain future events not wholly within the control of the entity.
● It is not recognized if it is not probable that an outflow of resources will be required to
settle the obligation or if the amount cannot be measured reliably.
● Contingent liabilities are disclosed in the notes to the financial statements unless they
are remote.
Contingent Liability Becomes a Provision

● When the outflow of future economic benefits becomes probable, a contingent liability
becomes a provision.
● This applies except when no reliable estimate can be made.

Measurement of Provisions

● The amount recognized as a provision should be the best estimate of the expenditure
required to settle the obligation at the end of the reporting period.
● This estimate should consider:
○ Judgment of the management of the enterprise.
○ Experience of similar transactions.
○ Reports from independent experts.

Warranty Expense

● Warranty expense is recognized in the year of sale based on the matching principle.
● It is calculated as total sales multiplied by the estimated warranty rate.
● The warranty rate is based on the company's experience and future expectations.

Warranty Liability

● Warranty liability is a liability that represents the estimated cost of future warranty
repairs.
● It is calculated as warranty expense minus actual warranty repairs.

Customer Loyalty Programs

● Customer loyalty programs are designed to increase customer retention and repeat
purchases.
● They can take various forms, such as:
○ Sales incentives.
○ Customer award credits or points.
○ Contract renewal options.
○ Discounts on future goods and services.
Value-Added Tax (VAT)

● VAT is a tax levied on the sale of goods and services.

● The seller is liable for the payment of VAT, but the amount may be shifted to the buyer.
● VAT-registered taxpayers can claim input VAT as a tax credit, which is offset against their
output VAT.

Accrued Liabilities

● Accrued liabilities are expenses incurred on or before the end of the reporting period but
payable at a later date.
● Examples include accrued salaries, interests, rentals, and taxes.

Liability for Bonuses

● Bonuses are amounts given to key management personnel and employees for superior
income realized during the year.
● They are based on the revenue or profit of the enterprise and are intended to motivate
officers and employees.
● When bonuses are unpaid at year-end, they become an accrued liability.

Deposits and Advances

● Deposits and advances are amounts collected in advance for goods or services that
have not yet been delivered.
● They are classified as current or noncurrent depending on the expected timing of the
refund.

Unearned Revenue

● Unearned revenue is revenue collected in advance for goods or services that have not
yet been earned.
● It is a liability that represents the obligation to provide the goods or services in the future.
Gift Certificates

● Gift certificates are a form of unearned revenue.

● They are recognized as a liability when they are sold and are recognized as revenue
when they are redeemed.
● If a gift certificate expires, the company recognizes a gain from forfeited gift certificates.

Dividends Payable

● Dividends payable is a liability that represents the company's obligation to pay dividends
to shareholders.
● It is only recognized as a liability when the dividends are formally declared by the
company.

This summary provides a comprehensive overview of the key concepts and principles covered
in the document. It highlights the accounting treatment of various liabilities, including provisions,
contingencies, customer loyalty programs, warranties, and VAT. The document also includes
practical examples to illustrate the application of these concepts.

The process for problem-solving when it comes to accounting for provisions,

contingencies, and other liabilities involves several key steps:

1. Identify the nature of the liability: Determine whether the liability is a provision, a
contingent liability, or another type of liability. This involves understanding the definition
of each type of liability and applying them to the specific situation.

2. Assess the likelihood of the outflow: Determine the likelihood of an outflow of resources
to settle the obligation. This involves considering the probability of the event occurring
and the timing of the outflow.

3. Measure the amount of the liability: If the outflow is probable, you need to measure the
amount of the liability. This involves considering the best estimate of the expenditure
required to settle the obligation.

4. Recognize the liability: Once you have determined the nature, likelihood, and amount of
the liability, you need to recognize it in the financial statements. The specific accounting
treatment will depend on the type of liability.
 5. Disclose the liability: You may need to disclose the liability in the notes to the financial
statements. This is especially important for contingent liabilities.

Here are some additional tips for problem-solving in this area:

● Consider the relevant accounting standards: The accounting standards provide guidance
on how to account for provisions, contingencies, and other liabilities.
● Use a systematic approach: A systematic approach can help you to avoid missing any
important steps.
● Document your work: Documenting your work can help you to track your progress and
justify your conclusions.

(Pasabi if mali hahaha)

an example of a problem-solving situation with explanation:
Problem:
ABC Company sells computers with a one-year warranty. The warranty covers repairs for
manufacturing defects. ABC estimates that warranty costs will be 5% of sales revenue. During
2024, ABC sold computers for a total revenue of P10,000,000. Actual warranty repairs during
the year amounted to P300,000.
Required:
Prepare the journal entries to record warranty expense and warranty liability for 2024.
Solution:
Step 1: Identify the nature of the liability:
The liability in this case is a provision because it is a probable obligation of uncertain amount.
ABC is obligated to repair defective computers, but the exact amount of future repairs is
uncertain.
Step 2: Assess the likelihood of the outflow:
The outflow of resources is probable because ABC is obligated to repair defective computers.
The warranty is a contractual obligation, and it is likely that some customers will need repairs.
Step 3: Measure the amount of the liability:
ABC estimates that warranty costs will be 5% of sales revenue. Therefore, the estimated
warranty expense for 2024 is:
P10,000,000 x 5% = P500,000
Step 4: Recognize the liability:
The following journal entry is used to record warranty expense and warranty liability:
plaintext
Copy
Warranty Expense P500,000
Warranty Liability P500,000
This entry recognizes the estimated cost of future warranty repairs as an expense in the current
period.
Step 5: Adjust for actual repairs:
The following journal entry is used to adjust the warranty liability for actual repairs:
plaintext
Copy
Warranty Liability P300,000
Cash P300,000
This entry reduces the warranty liability by the amount of actual repairs made during the year.
Explanation:
The warranty expense is recognized in the period of sale because of the matching principle.
This principle requires that expenses be recognized in the same period as the related revenue.
The warranty liability represents the estimated cost of future warranty repairs. This liability is
reduced as actual repairs are made.
Balance of Warranty Liability at Year-End:
The balance of warranty liability at the end of 2024 is:
P500,000 (estimated warranty expense) - P300,000 (actual repairs) = P200,000
This balance represents the estimated cost of future warranty repairs that ABC expects to incur
in 2025.
Key Points:
The accounting for warranties involves a two-step process: recognizing the estimated expense
in the period of sale and adjusting for actual repairs as they occur.
The warranty liability represents the company's obligation to repair or replace defective
products.
The balance of warranty liability at year-end reflects the company's best estimate of the cost of
future warranty repairs.
This example shows how to account for warranties using the steps outlined previously.
Remember that the specific accounting treatment for warranties may vary depending on the
specific facts and circumstances of the situation.
Formulas to remember:
1. Warranty Expense:
Formula: Warranty Expense = (Sales Revenue * Estimated Warranty Rate)
Explanation: This formula calculates the estimated cost of future warranty repairs based on the
total sales revenue and the company's experience with warranty claims. It's like setting aside a
portion of your sales income to cover potential repairs.
2. Warranty Liability:
Formula: Warranty Liability = Estimated Warranty Expense - Actual Warranty Repairs
Explanation: This formula tracks the amount of money the company owes for future warranty
repairs. It starts with the estimated cost (from the previous formula) and is reduced as actual
repairs are made. It's like a "warranty reserve" that decreases as you actually fix things.
3. Bonus Calculation (Profit Before Bonus and Tax):
Formula: Bonus = (Bonus Rate * Profit Before Bonus and Tax) / (1 + Bonus Rate)
Explanation: This formula calculates the bonus amount when the bonus is based on the
company's profit before deducting the bonus itself and income tax. It's like splitting the profit
before taxes between the company and its employees.
4. Bonus Calculation (Profit After Bonus but Before Tax):
Formula: Bonus = (Bonus Rate * Profit Before Bonus and Tax) / (1 + Bonus Rate)
Explanation: This formula is the same as the previous one, but it's used when the bonus is
based on the profit after the bonus is deducted, but before income tax is deducted. It's like
splitting the profit after the bonus is taken out, but before taxes are paid.
5. Bonus Calculation (Profit Before Bonus but After Tax):
Formula: Bonus = (Bonus Rate * (Profit Before Bonus and Tax - Income Tax)) / (1 + Bonus Rate)
Explanation: This formula calculates the bonus amount when the bonus is based on the profit
after income tax is deducted, but before the bonus is deducted. It's like splitting the profit after
taxes are paid, but before the bonus is taken out.
6. Bonus Calculation (Profit After Bonus and Tax):
Formula: Bonus = (Bonus Rate * (Profit Before Bonus and Tax - Income Tax - Bonus)) / (1 +
Bonus Rate)
Explanation: This formula calculates the bonus amount when the bonus is based on the profit
after both the bonus and income tax are deducted. It's like splitting the profit after all expenses
are taken out.